If you find the location of the pop-up controller in iTunes 7's standalone video window to be inconvenient, simply drag it out of the way. Any part of the controller that doesn't do something else can be used to move it around.

[robg adds: This is true for many of the floating controllers in various spots -- Preview's full-screen slideshow, for instance. I'm sure there are others. And yes, it might be obvious to some, but perhaps not to everyone.]